Diamond Offshore Drilling Inc. (DO)

Diamond Offshore (DO-1.9%) gives back much of yesterday's post-earnings gains, as analysts weigh in with divergent opinions on the stock - though no one could be considered a fan.

BofA raises its price target to $31 from $29 but keeps its Underperform rating, noting that counter-cyclical acquisition opportunities may be on the horizon following DO's suspension of its special dividend, which saves ~$400M/year; but the firm thinks a recovery in offshore drilling is a long way off, with a 20% Y/Y contraction anticipated in the market with little chance of new fixtures to be announced in 2015.

UBS and Cowen also raise their stock price targets, to a respective $35 and $28, but Deutsche Bank and RBC cut their targets, to $25 and $31 respectively, as a turn in offshore drilling fundamentals is too far in the future to make the group attractive to play a rebound in oil (Briefing.com).

Diamond Offshore (DO+2.8%) has recovered nicely from opening losses, an investors come to terms with DO's decision not to declare a special dividend for the foreseeable future (Q4 earnings), which it said would free up an additional $400M/year to make opportunistic acquisitions if assets become available at attractive prices.

Cowen analysts believe it is a prudent move to conserve cash through the current downturn in the offshore drilling market, and that the retention of the regular dividend will not trigger the forced selling witnessed when Seadrill completely eliminated its dividend late last year.

DO's Q4 revenues fell 7% Y/Y amid declining demand for its rig fleet; said use of its ultra deepwater floaters in Q4 fell to 66% from 80% in the year-ago quarter, and deepwater vessel utilization fell to 48% from 65%.

Offshore drillers fell sharply today along with crude oil prices even after Atwood Oceanics (NYSE:ATW) released FQ1 earnings that beat Wall Street consensus; ATW fell 0.7% in regular trading while peers all lost at least 3%.

Credit Suisse says ATW enjoyed a solid quarter, "but the outlook is all that matters," with contracting the ATW Admiral newbuild, which is scheduled for delivery in September, the key focus; the firm thinks getting the rig on contract, regardless of rate, would push the stock higher.

Cowen analysts think ATW, Noble Corp.(NYSE:NE) and Pacific Drilling (NYSE:PACD) are best positioned to survive an extended period of weakness; NE has 72% of its available floating rig days contracted in 2015, and 48% contracted in 2016. - a solid backlog, particularly considering it has not yet chosen to stack or retire a significant number of rigs, as its peers Transocean (NYSE:RIG), Ensco (NYSE:ESV) and Diamond Offshore (NYSE:DO) have done.

Offshore drillers are seen as some of the first casualties of oil price declines, as they have less flexibility in costs than oil explorers and depend on market-sensitive dayrates to generate revenue with their rigs.

Diamond Offshore (DO+2.8%) is downgraded to Underweight from Equal Weight at Morgan Stanley, which cites the potential for a dividend cut and an earnings miss.

The firm believes the dividend suspension by Seadrill paves the way for peers to evaluate their current payout strategy, and now expects DO to cut its elevated yield on Feb. 9; it also cuts its estimated 2015-16 EPS from $3.05 and $1.63 to $2.68 and $0.92 - well below the Wall Street consensus of $2.92 and $1.62 - although earnings risk probably is well appreciated at this point.

Stanley says “a new reality has set in” for offshore drillers generally, and foresees "a larger supply response to right-size marketed fleet utilization, and expect accelerating fleet attrition and newbuild delivery delays to materialize on the back of lower dayrates."

Zephirin Group’s Lenny Zephirin upgrades Seadrill (SDRL+9.3%), Noble Corp. (NE+4.4%) and nearly every other offshore driller in the firm's coverage, citing a significant change in market sentiment as mounting doubt of a recovery of oil prices that had held down share prices of offshore drillers reverses.

SDRL and Hercules Offshore (HERO+13.1%) are raised to Buy Speculative Risk from Sell, Ocean Rig (ORIG+10.4%) is lifted to Buy High Risk from Sell, NE and Diamond Offshore (DO+0.4%) is upgraded to Hold Speculative Risk from Sell, Ensco (ESV+2.4%) is lifted to Hold High Risk and Vantage Drilling (VTG+8.8%) to Hold Speculative Risk; the already had Buy rating for Transocean (RIG+5.9%) and Rowan (RDC+3.2%).

Energy stocks are higher across the board as crude oil trades up 4.2% at $51.66/bbl and sits nearly $9/bbl above its January low.

Transocean (RIG+5.1%) is downgraded to Underperform from Market Perform at Raymond James due to the firm's below-consensus estimates for RIG and higher uncertainty driven by a weak environment.

James cites RIG’s significant leverage to the spot ultra-deepwater market, with ~9.5 rig years’ worth of ultra-deepwater rig availability in 2015; given the level of uncertainty and RIG's investment grade rating risk, the firm expects the dividend will be cut at the next annual general meeting.

Even after modeling in ~$675M-plus in Y/Y cost reductions in 2015 and another ~$500M in 2016, largely due to stacking assumptions, the firm foresees RIG outspending cash flows by a cumulative $2B over the next two years, even after a dividend cut.

Susquehanna analysts add their own negative take, noting that RIG and Diamond Offshore (DO+3.3%) have the oldest fleets among the large-cap offshore drillers and thus the companies lack the asset quality to optimally benefit from increased demand even if the offshore drilling space recovers.

The situation at RIG is tricky, as Swiss law requires a shareholder vote to increase or lower the dividend; Credit Suisse says a dividend suspension would be the prudent thing to do, but RIG and DO likely will refrain from taking such a step after the selloff in SDRL; since SDRL suspended its dividend, shares have underperformed RIG by 1,200 bps and DO by 3,600 bps.

This has changed dramatically, Bespoke reports, as 10 of the 35 stocks are now from the energy sector; leading the way lower are Swift Energy (NYSE:SFY), Rex Energy (NASDAQ:REXX) and Comstock Resources (NYSE:CRK).

The firm expects offshore driller stocks to struggle with a supply/demand imbalance driven by the 62 newbuild floaters and 113 jackups coming to the market through 2016 (24% and 28%, respectively, of the working rig count), on top of weak demand, and sees demand curtailed as projects are delayed, resulting in declining utilization for offshore rigs and lower earnings for the majority of offshore drillers as rigs rolling off contracts could struggle to find contracts.

ATW is Goldman's lone Buy-rated name due to high contract coverage, a young rig fleet and favorable valuation; Sell-rated Transocean (RIG-4.6%) and Diamond Offshore (DO-4.9%) have high rig availability, exposure to aging assets, potential for asset writedowns, and risks to their current dividend payments.

Transocean (RIG+0.2%) is the top investment pick at Zephirin Group, which cites its expectations for the offshore drilling services company to consistently continue to deliver much stronger free cash flow than competitors such as Sell-rated Seadrill (SDRL+1.7%) and Diamond Offshore (DO-0.8%).

The firm says it is "an incredible slight" for Moody’s to consider a downgrade of RIG debt now or through 2017, as "the backlog that is due in 2015 is ~$5.8B and $13.4B thereafter, which in our opinion fully covered the company’s debt payment."

Although the energy sector led today's stock advance, a raft of companies downgraded by Global Hunter mostly took it on the chin - none more so than Key Energy (NYSE:KEG), which plunged 15% after shares were cut to Reduce from Neutral with a $1.50 price target that was reduced from $2.50.

Transocean (NYSE:RIG) shares finished sharply higher today (+7.9%), but it’s hard to ignore the largely negative December fleet status report that came out late yesterday.

In lowering his stock price target to $17 from $20, Cowen analyst J.B. Lowe said RIG secured one attractive contract this month, not enough to fill much needed ultra-deepwater floater availability; while RIG was able to put two idle floaters back to work, it had four additional rigs go idle, including one where the customer canceled the contract.

Transocean (RIG+4.6%) discloses that it plans to scrap seven of its older, lower-quality deepwater and midwater vessels, and adds that it may not be finished getting rid of parts of its fleet, even as oil prices and demand for offshore rigs have fallen.

RIG says it expects to take a related $100M-$140M charge in Q4.

RIG's decision to put the rigs up for sale comes after a string of vessel retirements and a $2.76B writedown of the company’s asset value in November.